This commentary is a follow-up to our previous Supply Chain Matters December commentary, Boeing Hits 2012 Delivery Target for 787 Dreamliner.  We noted reports that Boeing handed over 7 of the 787 aircraft to six customers during a 25 hour period in December, the classic “hockey stick” delivery method.  We questioned whether the milestone was part of an overall response to fulfilling a management mandated milestone.

The final piece of this story came this past week in The Wall Street Journal article penned by aviation industry blogger Jon Ostrower, and no doubt influenced by the Boeing PR team, with the headline, Boeing Likely Reigns as No. 1 Aircraft Maker. (paid subscription or free metered view) The article reports that by delivering 601 aircraft in 2012, Boeing has likely topped Airbus for the title of world’s largest aircraft manufacturer.

It turns out that this output exceeded Boeing’s guidance for between 585-600 aircraft deliveries for 2012, no doubt the milestone pegged for management bonus payments. Ostrower points out in his article that Airbus has also expected to lose its lead in new orders after a spectacular 2011. Boeing’s total backlog of unfilled orders increased to a record 4373 aircraft. However, both manufacturers may have to deal with lower new orders in 2013 because of changes in government backed export finance and the general state of the global economy.

Most importantly, the WSJ article notes that the global airline industry is expected to post a combined profit of $6.7 billion in 2012, 31 percent lower than the $8.8 billion recorded in 2011.

Supply Chain Matters remains of the viewpoint that while total deliveries remains a rather important metric for both Boeing and Airbus and broader aerospace supply chains, the most meaningful metric will be the performance of newly delivered aircraft in meeting airline and leasing company expectations.  The aerospace industry has a business model of long-term leasing and “pay by the hour” operating performance where consistent uptime, more advanced technology laden and fuel-efficient aircraft meets customer needs for increased profitability and overall safety.

Doesn’t it seem that this broader metric and track record should be the ultimate determinant of which manufacturer is the global industry leader?

We certainly do?

Industry participant views are encouraged.

Bob Ferrari

It has been interesting to view the slant of business media coverage these past few days over the topic of the global automotive industry.

In Europe, which can be best manifested by coverage of the Financial Times, last week’s headline was that for the first time, according to estimates provided by FT and five forecasting groups, China would outstrip Europe in global auto production in 2013.  China’s collective auto makers have plans to produce 19.6 million light vehicles compared with Europe’s current plans to produce 18.3 million units. In 2012, industry estimates are that China produced 17.8 million units while Europe produced 18.9 million units, a 6.2 percent reduction over 2011. However, in our view, the real headline for Europe is that the industry that commanded 35 percent of global production in 2001 is on course to produce just 20 percent of production in 2013 as it continues to deal with its ongoing economic debt crisis.  In contrast, China’s auto industry is set to increase production 10 fold in this same time period, fulfilling the prior expectations of a huge untapped market. As Supply Chain Matters noted in our 2013 Honorable Mentions Predictions commentary, the European auto industry faces more painful capacity reduction and/or plant closure decisions in the coming months.

On the U.S. side, the headline in The Wall Street Journal this week was: U.S. Car Sales to Zoom Past Europe’s. In the WSJ article, U.S. auto sales for 2012 are reported to be 14.4 million light vehicles, while the estimate for 2013 is 16 million vehicles. That article’s bias is that the U.S. market will be growth star for this year.

If you are confused with the contrast in headlines, you are not alone.  Beyond the typical bias, the real issues of confusion are around the definition of Europe’s auto industry.  There are the classic European Union countries and the extended Eurozone countries that include countries such Russia and Turkey.

The important takeaway for global automotive supply chains, however, is that market conditions in 2013 will be challenging to say the least. Three forecasting groups project that overall global auto production will grow a mere 2.2 percent in 2013.  A weak and uncertain global economy points to a highly competitive market in 2013, where market share will differentiate the survivors and losers.  There will be a need by global producers to have razor-sharp product and marketing strategies focused on the two countries with the most overall growth potential, that being China and the U.S.  While many global producers have adopted global-based model platform strategies that share common components and suppliers, we believe that the ability to customize these platforms for the unique needs of a regional market will be the ultimate test for automakers in 2013.  A great example has been how Mazda Motors  was able to modify its CX-5 SUV model with a diesel engine option for the Japanese market that achieves in excess of 45 miles-per-gallon.  The model has experienced tremendous appeal from Japanese auto consumers and Mazda would be wise to consider offering this same variation of the platform in the North American market.

Product and supply chain production and distribution strategies will more than likely be the differentiator in profitability, since global currency rates and market share will determine margin growth.  As an example, according to FT, one in every three cars produced by Volkswagen in 2013 will emerge from a factory in Asia.  Hyundai Motor recently completed its third plant in China and is re-visiting its production and component supply strategies in the wake of a precipitous increase in the Korean won. Ford Motor is aggressively attempting to catch-up in its supply chain investments in China and broader Asia. Supply Chain Matters has previously noted that Japan OEM’s have re-positioned strategies to have North America based plants serve as both domestic and export production hubs.

The ability to demonstrate continued supply chain efficiency, keen production and supplier sourcing strategies, proactive risk management and local market product uniqueness collectively make-up the most important 2013 headlines for the global automotive industry.

Bob Ferrari